The Role of Fiscal Policy in a Monetary Union: are National Automatic Stabilizers Effective? *

Andrea Colciago (), Tiziano Ropele, Vito Antonio Muscatelli () and Patrizio Tirelli

Review of International Economics, 2008, vol. 16, issue 3, pages 591-610

Abstract: We assess the role of national fiscal policies, as automatic stabilizers, within a monetary union. We use a two-country New Keynesian DSGE model, incorporating non-Ricardian consumers and a home bias in national consumption. Fiscal policy directly stabilizes non-Ricardian agents' consumption. By doing so it contributes to the reduction in the volatility of variables such as output, wage inflation, and real interest rates. Our analysis of country-specific shocks does not suggest potential inter-country conflicts (as long as policies are constrained within the automatic stabilizers framework). However, we detect a potential conflict between the two consumer groups, because fiscal policy may raise optimizing agents' consumption volatility. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd.

Date: 2008

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